July Prices Reflect Weak International Markets

On August 5, 2015, July Milk Class and Component Prices were announced.  The Class III price was down 2.3% at $16.33/cwt.  Inventories of the commodities that are used to determine component prices were all up, primarily due to weak exports in a difficult international market.  Higher inventories typically result in lower future prices.

The international markets have been difficult throughout 2015 due to a significant decrease in imports from China and Russia.  Additionally, the strong USD has made the U.S. Dairy products less competitive in the international marketplace.  U.S. exports have held up well in this environment, but the recently released June export data shows significant decreases in export volume and prices.   The decrease in exports is leading to higher U.S. inventory levels.

The body of this post will primarily review inventories of the commodities used to price the three components that make up the Class III milk price.  Those commodities are cheese, butter, and dry whey as they are valued by NASS.

The long-term trend chart below reflects these events.  The only higher price was butterfat, and it is up only by .5%.  Protein was down 3.1% and other solids which is very dependent on exports was down 13.7%.

The long term trends continue to follow pricing that would make protein worth slightly over $3/lb. and butterfat worth slightly over $2/lb.

As reviewed in a prior post, the most important dairy commodity for Class III pricing is cheese.  The largest export market for U.S. cheese is Mexico and exports in June were up 20% vs. the prior year.  (See the May 10, 2015 post for discussion on this market.)  Unfortunately, exports to South Korea and Japan were down 36% and 57% respectively, resulting is a 22% overall drop in cheese exports vs. the prior year.  In next post to this blog, the export markets and trends will be reviewed in more detail.

INVENTORIES

Wholesale inventories of the commodities used to price components were above prior year levels at the end of June.  They were generally not overtly high, but the trends were consistent and concerning.   High inventories will make the commodity prices fall, in turn reducing the value of components.

Cheese inventories for both natural cheese and American cheese were up.

The most concerning was the inventory of natural cheese.  It is near record levels.  July numbers will be out soon and they could reflect a record level for these stocks.  As the data becomes available, it will be covered in this blog.

Butter inventories are also high as compared to the prior year, and are at the second highest level ever for the end of June.  Butter exports have been very low for several months because there has been very little butter available for export.  Therefore butter pricing has been influenced primarily by domestic consumption.  Butter churning is below the prior two years and this is keeping inventories in check.  Currently more butter is being imported than exported making the U.S. a net butter importer.  More on this will be reviewed in the next post to this blog.

Inventories of dry whey are at record levels.  Dry whey prices determine the value of "other solids" in milk.  Dry whey is primarily an export item and exports and prices are determined by international conditions.  As shown in the long-term trends chart above, the value of other solids has been dropping consistently in 2015.  This appears to be a trend that will continue in 2015.  The inventory levels of dry whey shown below indicate that lower prices will likely continue.

Nonfat Dry Milk (NDM) is not used to calculate component prices.  However, it is  the basis of the nonfat solids price and in turn, it is the basis for Class IV Skim milk pricing.  Class IV pricing does determine the Class II price and can influence the Class I price.   In turn, this influences the producer price differential for producers paid on the component system and directly influences the price producers paid on the advanced system.

NDM is the largest export item for the U.S.  Exports in June were down 23% from the prior year.   Approximately 50% of NDM is exported, so a downturn in exports significantly increases inventories.  As seen below, these inventories are now at record highs.

The international price for NDM is very low.  U.S. exports to China are down 51% vs. the prior year.   More details on this market will be explored in the next post to this blog.

UPCOMING POSTS

The U.S. dairy market is entering a period of turmoil.   Some economists are forecasting lower prices for U.S. milk and other are seeing recovery by Q4 of 2015.  The CME futures market is showing no drop in cheese prices through the end of 2015, but it is showing a drop below $16/cwt. for Class III milk.  Cheese prices and the Class III price are closely linked via the formulas used to calculate component values, so the difference in trends is unusual. In the next few weeks additional posts to this blog will be made to review the most current dairy import and export data and the most current updates to the inventories reviewed in this post.